David Cameron has threatened to wield Britain's veto to block a revision of the Lisbon treaty if fellow European leaders refuse to protect the position of the City of London at the EU summit in Brussels .

In a marked hardening of his rhetoric, as Eurosceptic Tories called for a recasting of Britain's relationship with the EU, the prime minister said he would not sign any treaty that failed to provide safeguards for Britain's financial services.

The prime minister spoke out as Kenneth Clarke, the veteran pro-European justice secretary, told Eurosceptic Tories that they should abandon any hope of repatriating powers to Britain at this week's EU summit. "No, we're not going to renegotiate any transfers of powers, in my opinion," Clarke told the FT.

The intervention by Clarke on the eve of a crucial EU summit, which is designed to stabilise the eurozone, will irritate Eurosceptic Tories who believe that the prime minister is failing to do enough to protect British interests. But the substance of Clarke's remarks tallied with the prime minister.

The justice secretary agreed with the prime minister that Britain should use this week's summit to try and secure the position of the City of London. He said Britain should accept "proper" financial regulation from Brussels, though he rejected the idea of a financial transaction tax. "It's the devil's own job to collect," he said.

The prime minister echoed Clarke's view, though he used tougher language as he sought to reassure Tory Eurosceptics who were alarmed after Downing Street indicated on Monday that Cameron would not use the summit to demand the repatriation of social and employment laws. The prime minister said he would focus on protecting the position of the city and would be prepared to use Britain's veto.

"I will not sign a treaty that does not have those safeguards in it, around things like the importance of the single market and financial services," he told the BBC.

"If they choose to go ahead with a separate treaty then clearly that's not a treaty Britain would be signing or amending. But if they want to use the European institutions then Britain will be insisting on the safeguards and the protections that Britain needs.

"What I'm saying is that if – and eurozone countries do need to come together – if they choose to use the European treaty to do that then Britain will be insisting on some safeguards too. As long as we get those then that treaty can go ahead. If we can't get those, then it won't."

The prime minister reportedly told the cabinet on Monday that a referendum on a revised EU treaty would divide the coalition. Tim Montgomerie, the editor of the ConservativeHome website, wrote: "He told his cabinet colleagues that a referendum would tear the coalition apart and couldn't be countenanced." Eurosceptic Tories are demanding a referendum.

EU leaders are expected to agree a limited treaty change to put in place tough new fiscal rules for the eurozone. Nicolas Sarkozy and Angela Merkel, who outlined their plans for treaty change in Paris on Monday, would like the Lisbon treaty to be revised by all 27 members of the EU.

But in remarks aimed at Britain they indicated that they would be prepared to agree a treaty among the 17 members of the eurozone if they cannot reach agreement among all EU members. This means that Cameron is highly unlikely to be able to wield the British veto even if he wanted to.

The European commission could be empowered to impose austerity measures on eurozone members that are being bailed out, usurping the functions of government in countries such as Greece, Ireland or Portugal. Bailed-out countries could also be stripped of their voting rights in the European Union, under radical proposals that have been circulating at the highest level in Brussels before this week's crucial EU summit on the sovereign debt crisis.

A confidential paper for EU leaders by the council president, Herman Van Rompuy, who will chair the summit on Thursday and Friday, said eurobonds or the pooling of debt would be a powerful tool in resolving the crisis, despite fierce German resistance to the idea.

It called for "more intrusive control of national budgetary policies by the EU" and laid out various options for enforcing fiscal discipline supra-nationally.

The two-page paper, obtained by the Guardian, formed the basis for discussions on an interim report tabled by Van Rompuy, the European commission and the Eurogroup of countries that have adopted the euro, which is to be debated today among senior officials in an attempt to build a consensus.

Stewart Jackson, the Conservative MP who resigned as a ministerial aide after rebelling against the government in a commons vote on the EU in October, wrote on ConservativeHome: "People will not understand if our prime minister fails to take advantage of the unique generational opportunity and congruence of events to press British interests and, more specifically, recast a whole new more mature and looser relationship with the European Union, in the event that the eurozone countries head off towards a children's crusade of 'fiscal discipline' – which it never has been and never will be in this country's long-term political and economic interests to support. The idea that the solution to a sovereign debt crisis is financial and political union flies in the face of reality and the withering verdict of the money markets."

Cameron spoke out after Brussels hit out at international credit rating agencies for "systematically" downgrading the forecasts of eurozone countries in the days leading up to European summits. Amid anger in EU capitals over the decision of Standard & Poor's to place 15 eurozone members – including France and Germany – on credit watch, EU sources said they had started to detect a pattern of behaviour by the agencies.

"It is interesting to look at the downgradings and the timings of the downgradings," one EU source said. "You will see systematically there are downgrades in the week of European Councils ... It is strange that we have so many downgrades in the weeks of summits."

Jean Claude-Juncker, the prime minister of Luxembourg who chairs the Eurogroup of finance ministers, dismissed the downgrade as a "wild exaggeration and also unfair".

The move by S&P caused particular anger because the announcement was made on Monday shortly after Angela Merkel and Nicolas Sarkozy had outlined their plans for EU treaty change to try to stabilise the euro. Merkel was dismissive of the move.

S&P followed its warning to 15 members of the eurozone by indicating that it may lower the triple-A rating of the eurozone bailout fund, the European Financial Stability Facility.